Mind on My Money

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John Nofsinger is an associate professor of finance at Washington State University and a speaker, writer, and scholar on behavioral finance. See full bio

August 29, 2009, Behavioral Economics

Combining Gambling and Saving

Can linking gambling and saving help people save more?

This program is designed to help lower income households save more. Low-income families in the United States play lotteries and they believe that they are more likely to become rich from lotteries than from saving. Thus, to encourage more savers and savings, consider a saving's product that has a lottery prize drawing. These lottery-linked deposit accounts use each savings deposit (or bond purchased) as a "buy-in" to win lottery prizes selected frequently. The excitement of gambling draws people to start saving. The savers earn a slightly lower interest rate than they could obtain elsewhere. The difference between what they could obtain and what they actually get is the money used for the lottery prizes periodically awarded. This structure appeals to loss-adverse investors. They have the safety of the savings account and the excitement of the potential to win a lottery.

These programs have existed for centuries internationally. The longest running program may be the Premium Bond in Britain, started in 1956. The bonds require a £100 minimum purchase and make the purchaser eligible for monthly prize drawings. The excitement of gambling is maintained as more than 1 million prizes are given at each drawing. Prizes range from two £1 million prizes to more than a million £50 prizes. Over £30 billion of savings are held in Premium Bonds by one quarter of British households. Programs in Central and South America give away cars and equivalent prizes daily with larger lotteries drawn monthly. The Million-a-Month-Account program was started by First National Bank in South Africa in 2005.

Recently, a program called "Save to Win" was started by in Michigan and implemented through several credit unions. It is designed by the D2D Fund. Each $25 deposit into a savings account gives a chance to win (up to 10 chances) monthly cash prizes (cash, gift cards, laptops, etc.) and cumulates for chances to win the annual $100,000 grand prize. Time will tell how successful this program will be in promoting saving. $90 billion is spent on gambling in the United States each year, if only a small fraction of that is done through lottery-linked savings accounts, those individuals would be much better off!

For other programs that use psychology to help people make better decisions, see this post.

Reference: See Peter Tufano, "Saving whilst Gambling: An Empirical Analysis of UK Premium Bonds," American Economic Review 98(2008): 321-326; Mauro Guillen and Adrian Tschoegl, "Banking on Gambling: Banks and Lottery-Linked Deposit Accounts," Journal of Financial Services Research 21(2002): 219-231; and Peter Tufano and Daniel Schneider, "Using Financial Innovation to Support Savers: From Coercion to Excitement," in Access, Assets and Poverty, ed. Rebecca Blank and Michael Barr, Russell Sage, forthcoming.